7 August 2017
Australian shares recovered the ground lost over the previous week and are up 0.3%. Shares in developed countries rose 0.4%, with the US share market up 0.2%. Shares in emerging markets extended their four week rise by 0.4%. The Australian dollar slipped back 0.8% to 79.22 US cents. The 10 year bond yield in Australia was 0.06% lower at 2.62%, while in the US the 10 year bond yield closed the week 0.02% lower at 2.26%. The oil price declined by 0.3% to 49.58 US dollars per barrel.
Increasingly the superannuation industry is being heavily scrutinised amid claims that it focuses heavily on accumulators, those saving for retirement and little on retirees. This scrutiny has come from many corners including government, regulators and media commentators.
To a large extent the industry criticism is warranted but of course there are large differences between individual super funds. At Mine Wealth + Wellbeing (Mine) our dedicated retirement outcome modelling team is working hard to design and test retirement solutions.
The below example illustrates how we focus on those saving for retirement and our fund’s retirees. It highlights that, while the industry as a whole may be struggling to do the best for their retirees, funds such as Mine are driving best outcomes for retirees.
Superannuation funds commonly construct diversified options and then offer these same products to both super and pension members. Further, most of these funds communicate identical investment objectives for the super and pension options. This is poor practice and the reason for this is tax.
Those saving for retirement are taxed on their superannuation earnings while those who are in the retirement phase are not taxed on their fund earnings. Tax does two things. Firstly it reduces investment returns when they are positive, which we expect over the long term, and this is well known. What’s less understood is that tax actually smooths returns and hence reduces volatility. Tax takes a slice off positive returns, and losses can be used to offset subsequent gains. Given the same portfolios, changes in unit prices for accumulators will be less bumpy than for retirees.
This is interesting. It means that if a member of a typical super fund continues in the same investment option once they retire they’re actually taking on more risk! We take a view that most of our members do not want to take more investment risk once they retire.
This insight is known to many in the industry, but is largely ignored. Perhaps it’s put in the too hard basket, however we’ve fixed this problem. We now provide uniquely constructed portfolios for both our accumulation members and our retirees, accounting for the effect of different tax rates. These super and pension portfolios now also have unique investment objectives for improved transparency.
We are one of the only super funds in Australia to do this. While it took some clever thinking, it also took a huge amount of work and effort to implement the changes to our operating structures and processes. We’re proud that we could improve our offerings and provide our members with a better service. At Mine we’re here to provide the best retirement outcome possible for our members, recognising that this is a whole of life journey.
David Bell | Chief Investment Officer